September 5, 2012 12:48 PM
We all know that the stock market swings wildly between manic periods of fear and greed. Nowhere are these swings more severe than in economically sensitive companies. Normally, these swings make sense. Every once in a while, I just shake my head and say “wow, fear sure is one strange emotion.”
Anyone following the junior mining space has known that juniors cannot raise capital lately. Naturally, this means that they are cutting back on exploration spending. One would expect this to impact the short-term earnings of companies doing exploration work; however the long-term business fundamentals are unchanged. The world is mining more stuff than it is discovering, and exploration needs to increase just for producers to keep pace with depletion. The bludgeoning that these drillers have experienced in the past month is just stunning. Readers of this site are familiar with Energold (EGD: Canada), so I will talk about a competitor, Boart Longyear (BLY: Australia) the largest hard rock drilling company in the world.
On May 1, the stock closed at 4.19. Yesterday it closed at 1.11. The reason for the decline? Fear. Guys are scared of 2009 repeating. In 2009, Boart saw a dramatic slowdown in demand for drilling, a crushing debt load and in order to avert a possible bankruptcy, they did a very dilutive equity offering near the lows. Today, the stock is at a dollar, in 2007, it was over twenty dollars. Dilutive offerings are painful and they leave a very scared shareholder base.
Let’s look at Boart today. Tangible book is $1.65 a share. They earned 21 cents a share in the first half and are looking to pay a 6.4 cents half year dividend (Aussies report earnings on the half year). In 2011, the company reported 35 cents a share of income and paid a11.4 cent dividend for the year. The company is flush with cash, debt is manageable and as business slows, receivables will be collected and converted into cash. It’s not like business is falling off a cliff or anything either. While the company lowered guidance for the second half, they’re expecting things to be only down a bit from the first half. I’m not going to tell you that I know how to value a company like this, but a 10% yield on last year’s dividend, four times last year’s earnings and about a similar multiple on this year’s earnings seems kind of silly to me. Insiders also seem to agree with me. Three of them bought shares in the past week, at prices that are 20% higher than today’s close.
Should you go out and buy some Boart? Probably not, Energold is the better business, but I look at the price and cannot help but buy a few Boart, just for amusement in the hope of seeing a nice bounce. I really cannot remember seeing a sector get washed out like this on very little in the way of long-term negative news. Sure, the juniors aren’t doing much, but the producers are coining money and making up for years of underinvestment in existing assets. There is a lot of drilling to do, and someone has to do it. The earnings might shrink in the short term, but long term, these are solid businesses with long term demand. I’m stumped at why investors act like they’re going bust.
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